Capital investment decisions are that decisions in which we invest our money in big projects like purchasing of machinery and setting up a new plant or show room etc. So, we should know, the types of capital investment decisions. We can divide capital investment decisions on the following basis.
A. On the Basis of Firm's Existence
1. Buying New and Replacement of Fixed Asset
If company or firm is newly incorporated, it will take which new fixed asset should be purchased but an existing form will take capital investment decisions relating to replacement of any old fixed asset due to modernization. Company will take decision which fixed asset should be replaced and which new fixed asset should be purchased after replacement.
2. Expansion of Fixed Asset
In these decision, company may take decision to extend fixed asset for improving efficiency. Suppose, we have one plant but due to increase of demand, we can take decision for expansion it.
3. Diversification Decision
For reducing risk of business, company may take decision to diversify its business or market. Suppose, one company is doing online business of selling laptop, it may take decision for selling of ipad or mobile. But for this, it need to invest big amount.
B. On the Basis of Decision Situation
1. Mutually Exclusive Decision
Mutually exclusive decision are those capital decision in which we accept one proposal and other will not include in it. For example, we can buy semi automatic machine or highly automatic machine. If we have taken decision for buying semi automatic, it means, we will not use highly automatic machine. Cost of major factor for taking such decision. Cheap investment may be our best option. Following example may explain it more.
2. Accept and Reject Decision
If we take decision of accept and reject of project on its return basis, then these type of decision will be accept and reject decisions.
3. Contingent Decision
These are the decisions in which one decision requires other decision. Suppose, we have to take decision to make plant, for making plant, we also have to take decision for making building and buying of machinery.
Related : Financial Management
A. On the Basis of Firm's Existence
1. Buying New and Replacement of Fixed Asset
If company or firm is newly incorporated, it will take which new fixed asset should be purchased but an existing form will take capital investment decisions relating to replacement of any old fixed asset due to modernization. Company will take decision which fixed asset should be replaced and which new fixed asset should be purchased after replacement.
2. Expansion of Fixed Asset
In these decision, company may take decision to extend fixed asset for improving efficiency. Suppose, we have one plant but due to increase of demand, we can take decision for expansion it.
3. Diversification Decision
For reducing risk of business, company may take decision to diversify its business or market. Suppose, one company is doing online business of selling laptop, it may take decision for selling of ipad or mobile. But for this, it need to invest big amount.
B. On the Basis of Decision Situation
1. Mutually Exclusive Decision
Mutually exclusive decision are those capital decision in which we accept one proposal and other will not include in it. For example, we can buy semi automatic machine or highly automatic machine. If we have taken decision for buying semi automatic, it means, we will not use highly automatic machine. Cost of major factor for taking such decision. Cheap investment may be our best option. Following example may explain it more.
2. Accept and Reject Decision
If we take decision of accept and reject of project on its return basis, then these type of decision will be accept and reject decisions.
3. Contingent Decision
These are the decisions in which one decision requires other decision. Suppose, we have to take decision to make plant, for making plant, we also have to take decision for making building and buying of machinery.
Related : Financial Management
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